Need to restore fiscal balance

FM’s Budget should express his resolve on pressing issues

By Dr Rajiv Kumar

THE forthcoming Budget has a lot hanging on it. Given his accumulated wisdom gathered over decades of political leadership, the Finance Minister surely realises that the Budget offers an opportunity to turn around the rather downbeat mood in the country about its economic prospects. The first imperative for the Budget, therefore, must be to ensure that it is not another routine statement of government accounts and rises above it to be seen as a policy statement of a government that is seized of the issues facing the economy and is committed to address them.

Therefore, the Budget should include some major policy initiatives, like the notification of the rules for permitting 100 per cent FDI in multi- brand retail; permission for 49 per cent FDI in civil aviation; notifying Aviation Turbine Fuel as a ‘ declared good’ that attracts a Central Sales Tax of 4 per cent; removal of Minimum Alternate Tax from SEZ units, which is causing considerable distress having been applied even for units that were established on the premise of hundred per cent tax exemption.

Measures

Such changes in the tax and policy regime are highly avoidable as they create policy uncertainty for investors. The Budget should also announce the exemption of all perishable agriculture products from the ambit of the Agricultural Produce Marketing ( Regulation) Act and its immediate implementation in UPA ruled states like Delhi and Maharashtra and stipulate a minimum tariff for electricity supplied to farmers, again starting its implementation in UPA states.

It should be pointed out that none of these announcements require any legislative clearances and can therefore be implemented right away. Including them in the Budget, rather than announcing them piecemeal, will create much greater positive impact and show the Finance Minister to be in control of the economic situation and as the leader of the government's economic team.

The Budget would do well to put a high growth rate back on the agenda. For India eliminating degrading and dehumanising poverty by creating hundreds of millions of employment opportunities is far more important than trying to achieve greater income equality. The Budget would do well to emphasise that poverty will not be eliminated by creating a vast and unsustainable network of entitlements but by empower- ing our people by imparting them skills and employing them in productive jobs. All this will happen only if all of us recognise that a seven per cent rate of growth, though undoubtedly high by international standards, is simply not good enough for India given the need to generate millions of new jobs and meet the high aspiration levels of our young population.

Achieving high growth over sustained periods, requires commitment to macroeconomic stability.

An essential component is to ensure fiscal balance. Given the economic slowdown, fiscal targets are under severe pressure. A likely scenario is that the central government's fiscal deficit will cross 5.8 per cent and the combined deficit of the state and central governments will perhaps reach double digits. This will not allow interest rates to come down and will crowd out private investment that is already at unacceptably low levels.

Revenues

Given the stickiness of public expenditures and, in fact, severe pressure to expand it further on various subsidies like food, fertilisers, petroleum, education, electricity, etc, revenues have to be increased. Tax revenues as a percentage of GDP have declined since 2007- 08 falling to 14.73 per cent in 2010- 11 from 17.36 per cent in 2007- 08. Direct tax revenues have also declined, from 6.39 per cent in 2007- 08 to 5.48 per cent in 2010- 11. Thus, there is both need and scope for expanding revenues.

Currently, we have only 34 million personal income tax payers in the country and 96 million PAN card holders. This implies that barely a third of the households pay income tax. With another third of the households below the poverty line, it still leaves another third or 80 million eligible households outside the tax net.

This needs to be rectified. An expansion of the tax net will also remove the pressure to raise rates. Of those currently in the tax net, a minuscule number, about 10,500 persons, declare incomes of above Rs 10 crore. I am convinced that there are more people earning Rs 10 crore in Mumbai alone! And only 110,000 declare their annual incomes to be above Rs 1 crore, which again should be simply unacceptable. A thorough reform of the direct tax administration is long overdue and should be initiated in the forthcoming Budget.

The need for increasing tax revenue brings back the issue of taxing agriculture incomes. This has simply been taken off the agenda and perhaps rightly so given the overall backwardness of our agriculture and the administrative costs of collecting these taxes.

But this has now become a major source of direct tax evasion. It is time that this loophole is closed.

One way forward could be to tax all incomes in which agriculture income constitutes less than a given percentage. An increase in direct tax collections, will decrease the dependence on revenues from indirect taxes which is progressive making Indian industry more competitive.

The Budget may also announce some measures to raise non- tax revenues. Given the negative stance of equity markets in 2011- 12, there is little hope of attaining the divestment target of Rs. 40,000 crore. The Budget should encourage the consideration of bolder steps such as finding strategic buyers for public sector units and assets. We have to get over this self- imposed ban on outright privatisation of poorly performing public sector entities in sectors such as airlines, hotels, mining, construction, among others. How long will the taxpayers continue to acquiesce in a mis- utilisation of their taxes in shoring up loss making public sector enterprises which do not even remotely serve any strategic functions? All these above measures will show the Finance Minister's resolve to achieve fiscal prudence and restore macro- economic stability.

This would be a strong signal for investors that India is moving away from populism and reverting to the path of high growth with macro stability. As a complete contrast, any allocation in the Budget for implementing ill conceived and poorly designed entitlement schemes will send the completely wrong signal and significantly worsen the investment climate.

Higher growth in revenues, both tax and non- tax, as suggested above, will create the fiscal space for three necessary measures.

First, the Budget should announce the continuation of the explicit tax exemption of recognised NGOs, chambers of commerce, industry associations and charitable organisations. These organisations often play a vital role in industrial development and social uplift of weaker sections. As long as their surpluses are used for their designated activities, their incomes and surpluses must remain exempted. The underlying principle of taxation should consider the final use of these surpluses rather than generation of surpluses themselves.

Welfare

This will endear the Finance Minister to civil society and also remove a lot of unnecessary confusion that prevails currently. The second measure that will be possible with greater fiscal space is a doubling of expenditure on public health, which remains among the lowest in the world. More than two thirds of expenditure on health is still private. This not only creates avoidable inequities but also forces a relapse into poverty of households that may have worked hard to come out of it. The disbursement of these additional funds could be made conditional on achieving some minimum governance standards that will improve the delivery of public health services in the states.

Finally, now that the Right to Education has been enacted, the government must be committed to ensuring universal access to secondary education. This will also require a huge expansion in education sector outlays, which the Budget should announce as part of a medium term plan of resurrecting the public education system in the country. However, here again, additional disbursements should be made conditional on achieving better governance in all aspects of the public education system, with the responsibility lying primarily with the states.

The writer is secretary general of FICCI. The views expressed here are personal